Hi Greg and threadsters, RE: "If we are heading into a deep and prolonged recession (worst case scenario), how would you change your investment/savings strategy?"
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If only one could predict a recession in advance, but since recessions come and go, and because it is difficult to predict exactly when, and since the stock market tends to act 6 months in advance of the anticipated event, I simply remain in hightech even through recessions.
Cash is king in a recession: in the decade of the depression, bonds yielded 6.9%, while stocks remained flat (-.1%), although this is misleading since the 1930-1931 was so bad it brought the average for that decade down, while new investors gained enormously between 1933 to 1940).
Click on Fidelity's "Explore the Map of the Market":
personal100.fidelity.com
Click on 9/1/00 (about when Intel started falling), and notice how technology is "red" but consumer staples" is "green."
==> Albertson's (food store) grew at 56.88% since 9/1/00, while INTC dropped about 58.24%.
People have to buy food even in a recession. (Note: some consumer staples had incredibly low valuation p/e's of 6-8 while nasdaq was hitting the moon and hightech p/e's were well over 50).
I tend to keep 10% in what I call cash: money markets, FDIC, bonds. 10 to 15% in SNP. 75% to 80% hightech, of which INTC is half of the hightech portfolio.
In an inflation economy, real estate is great, however, I would not invest in real estate after a real estate boom has occurred, unless I felt that inflation was a bigger risk (but even then, I would be very cautious with real estate investments, especially after a real estate boom). ( After Japan's stock busted, it took a solid 1.5 years before their real estate declined. There is a big 6-month or more delay between stock and real estate.)
So, what would I do with my hightech stocks in a recession economy? I tend to write short-term covered calls, which tends to increase the number of shares owned during a downturn. I think I've increased my stock ownership by about 30%. However, the risk will be on the last leg, when it shoots up, and this would be when I have to start pushing calls out. But I keep this risk on no more than 33% of the stocks (i.e. I don't write calls on all my stock, only a third).
My goal is to take advantage of a downturn and try to increase stockownership on solid companies by using premiums to buy more stock, so that when stocks do recover, the upswing is rewarding. ( During the Depression, folks that had cash were taking advantage of the downturn by buying investments that were incredibly inexpensive. Side note, if you ever have a chance to visit the Dallas art museum, they have an incredibly impressive collection of paintings because many were acquired during the Depression when prices were very depressed (families bought, then donated these). )
The trick is to have enough cash to get you through any downturn and to take advantage of it too. This requires discipline to not over invest and to not over spend, which America tends to lack (America's savings rate is now negative. In the 80's, even at the formerly lowest savings point around 1984 (I think) when the auto industry almost went bust, the savings rate was around 5% (about), so the 90's created a concerning situation where an incredibly low savings rate exists - it's a linear line headed straight down from 1990 to today, from about 10% savings down to -2% savings, and it is the first time ever in this country's history to have a negative savings rate).
An interest-rate induced recession (I believe) may last on average 12 or 16 months (the article has the exact number, I don't), while a capital-bust induced recession last on average 22 months (i.e. tends to be longer). Ours is more of a capital-induced mfg recession, so one could expect a longer downturn, however, we do not have anything fundamentally wrong with our economy in terms of how competitive we are relative to other countries, unlike the '70s and 80s, although rising energy costs are a concern and so is foreign capital levels.
If you take a look at the Depression, some stocks plunged around 85% or more (just like CSCO recently did). However, if you invested in at the bottom (which was not the year after the initial big drop, but 2 years later), that produced a pretty good immediate return. (But it did take the stocks a long time to fully recover to their high's - a decade or two - if a person had invested at the absolute top). However, I want to point one thing significant out: a stock like GM (General Motors) took about two decades to recover to its bubble high, because I believe they sold cars, a luxury consumer product in a depressed economy, not a business product whose technology was changing every year. Consumers wanted food, not cars.
But businesses had to stay competitive. The best thing we have going for today's economy is change. Products change faster than what they did in the '30's, and this is good for stocks, especially for companies that sell products into the business sector. Companies have to stay competitive, and as an example, GE is increasing capital spending by 11% this year (I had read) because it wants to use web-based technology for their internal organization & suppliers, in order to save them billions of dollars.
Off the top of my head, I recall an article that said anyone who invested $100 every month from 1930 to 1956 achieved $500,000. The '70's did lousy by comparison - I think only $40,000, as a comparitive study. So, from a stock standpoint, the Depression wasn't bad, provided you continued to invest and took advantage of a downturn.
And buying more shares from premiums is one way to do this.
Of course, your risk is a market recovery and having good stock called away at say a 10% gain, is why I would recommend doing this on no more than 30% of your portfolio.
But my strategy is very stock oriented. I believe in America's corporations. If US corporations go completely bust, then I'll be hurting, along with everyone else. My bet is that they won't and that is my risk.
My strategy means a person has to have the ability to stomach a 50% decrease in their portfolio, which is what I experienced from the high's of April-00 to January-01.
Through writing calls, I'm now down 40% (instead of 50%) from the high. It's improved a bit, but I have still a long way to go for full recovery and am no way near as recovered as Willcousa's portfolio. So, my method has big minuses, as evident by this incredibly large decrease. There are a lot of people on SI that didn't experience much of a decrease at all, some folks in other sectors even gained last year, and the bond-folks had a party.
I'm stock-oriented and there are pros/cons to this (last year being a sample of the con). During a downturn, my strategy is to increase stock-ownership, and stick with hightech, particularly INTC. I think mfg recessions tend to be good for INTC over the long-haul as they improve efficiencies; Intel has the ability to get lean and efficient and has a manufacturing culture which means its culture is very cost-effective, a good thing in a manufacturing recession and especially when the economy recovers.
When INTC recovers, it will have reduced some fixed costs, so at the next uptick of the next semi-cycle, any incremental revenue could be based upon lowered costs, which means to me, the earnings potential could be much larger.
A recession isn't a big concern. Covered calls would handle that. But inflation would be a very big concern and I just read that some indicators showed it is coming back, if you can believe it.
Inflation is the enemy of any retiree or investor. I have yet to figure out what to do in an inflation economy (other than gas/oil & real estate, which of course have already appreciated greatly). In the 70's anyone who invested in stocks would have lost 40% in real value (after correcting for soaring inflation). So contrary to popular belief, the 70's were worse than the '30s for stockholders in real dollars, as measured by an investment of $100/month and corrected by inflation.
Regards,
Amy J |
